Navigating the Mortgage Process as a Self-Employed Individual

In 2023, a whopping 11.8 million Americans were self-employed.

If you see yourself in that figure, there’s a good chance you’ve already navigated some big milestones, like managing variable income or staying on top of tax season.

The good news? Purchasing a home isn’t impossible for self-employed individuals. The not-so-good news? This might be yet another avenue where you’ll need to employ some creativity and flexibility.

If you’re planning to purchase a home while self-employed, here’s what you’ll need to know:

Understanding the Mortgage Process for the Self-Employed

Unfortunately, getting a mortgage is typically easier for W2 employees. That’s because mortgage lenders need a high degree of confidence in a borrower’s ability to repay their loan.

Of course, many self-employed individuals are capable of paying their debts. And millions already have!

But mortgage lending is all about risk analysis and consistency. So, some financial institutions are overly cautious when it comes to any kind of irregularity.

It’s important to note that getting a mortgage while self-employed definitely isn’t impossible. But you’ll probably have a higher documentation burden and may see some tighter requirements.

That’s why, if you take one thing away from this blog, it should be this: Seek out a mortgage professional who has extensive experience with self-employed borrowers to help navigate the process. They’ll have expert insight and advice to help make your dreams of homeownership a reality.

In the meantime, let’s dive a bit deeper into the homebuying process for self-employed individuals.

Gathering Documentation as a Self-Employed Borrower

The exact documents you’ll need will depend on your situation, loan type, and lender, so it’s always a good idea to consult with a mortgage professional.

But, in general, expect to collect and hand over the following documents:

• 1-2 years of personal and business tax returns. This includes all schedules and attachments, such as 1099 forms, Schedule Cs, and K1 statements.
• Profit and loss statements and balance sheets to show your business income, expenses, assets, and liabilities.
• 12-24 months of personal and business bank statements to show your cash flow and financial management.
• Any applicable business license and client contracts to show the legitimacy and stability of your business.

You might eventually be asked to provide additional documents, such as:

• Applicable business licenses.
• Proof of client relationships.
• Proof of business insurance.
• Letters from professional or business organizations you belong to.
• A letter from your CPA, accountant, or tax preparer.

Every situation and self-employed borrower are different, so remember: a mortgage professional can provide the most appropriate, personalized guidance here.

Strengthening a Self-Employed Mortgage Application

Strong financial documentation is typically the bare minimum that self-employed borrowers will need to secure a mortgage.

If you want to try and improve your odds of approval further, there are a few things you can do:

• Always keep business and personal finances separate. This demonstrates responsibility and control while minimizing liability.
• Consider taking fewer tax deductions in the year or two leading up to your home purchase. This can drive your net income up, illustrating a better ability to pay a mortgage.
• Increase your credit score as much as possible. Lenders will typically require a score of 620. But the higher the better, as higher scores equate to lower risk in the lender’s eyes.
• Pay down debt as quickly as possible. Lenders will generally look for a debt-to-income (DTI) ratio of 43% or below. This means no more than 43% of your gross monthly income goes toward other debt. But the lower the better, as a low DTI demonstrates greater ability to manage debt and successfully make future monthly mortgage payments.
• Save as much as possible. Larger down payments decrease the risk for the lender, as your eventual loan amount goes down. Your lender might also require you to have cash in the amount of 6-12 months’ worth of mortgage payments on hand, in case of business downturns.

Finding the Right Loan as a Self-Employed Borrower

The right loan type will depend on your unique situation and financial status, but luckily, most self-employed borrowers have many of the same options as their W2 counterparts.

These might include:

• Conventional loans. These are standard, non-government-backed mortgages offered by private lenders. Self-employed borrowers will need strong credit, a low debt-to-income ratio, and consistent income documentation, including solid tax returns and financial records.
• Bank statement loans. These loans are specifically designed for self-employed borrowers. Instead of using tax returns, lenders verify income using 12-24 months of personal or business bank statements, offering more flexibility for those with variable income.
• FHA loans. Backed by the Federal Housing Administration, FHA loans are popular for their low downpayment and flexible credit requirements. Self-employed borrowers can qualify for FHA loans, but they must provide at least two years of tax returns showing steady income.
• VA loans. These loans are guaranteed by the U.S. Department of Veterans Affairs and are only available to eligible veterans, active-duty service members, and some surviving spouses. They offer no down payment and competitive rates, though self-employed applicants need to show reliable income via documentation.
• USDA loans. Backed by the United States Department of Agriculture, USDA loans support low- to moderate-income buyers in rural and suburban areas. Self-employed borrowers can benefit from zero downpayment and low interest rates, but they must demonstrate income stability through detailed financial records.

Each and every self-employed borrower will have a different situation, and different potential avenues when it comes to loan type. Consider connecting with a mortgage broker, who can explore, investigate, and shop multiple loans on your behalf.

Wrapping Up: Buying a Home While Self-Employed

If you’re self-employed, purchasing a home is well within reach with a little preparation and the right homebuying team.

Consider working with a mortgage professional who has extensive experience with borrowers just like you. Ask about their experience in assessing variable income, knowledge of applicable loan types, and success stories from previous self-employed clients.

The right mortgage professional will work to understand your unique situation and ultimately try to connect you with a home loan that best fits.

Now, get out there and get to buying!